- The Washington Times - Friday, January 27, 2006

The U.S. economy slowed sharply in the fourth quarter of 2005 as consumers, businesses and the federal government scaled back spending, according to Commerce Department data released yesterday.

Gross domestic product, which measures U.S. economic output, expanded at a 1.1 percent annual rate for the period, the slowest growth in three years and down significantly from 4.1 percent in the previous quarter.

The preliminary Commerce Department numbers also showed the economy slowing slightly for the entire year, with growth at 3.5 percent in 2005, down from 2004’s 4.2 percent.

The numbers had limited effect on Wall Street. The Dow Jones Industrial Average rose 98 points, or 0.90 percent, to 10,907.

The fourth-quarter economy reflected higher energy prices, American consumers buying fewer autos, businesses paring back investments and falling government defense spending.

“Clearly, high gasoline prices took quite a toll on the typical consumer,” said David Huether, chief economist at the National Association of Manufacturers.

“Purchases of motor vehicles and parts fell at an annual rate of 45 percent — that’s the biggest quarterly decline of the past 15 years — and this alone accounted for more than a 2 percent drop in GDP growth,” he said.

Still, consumers continued to spend more than they saved. That, together with rising business inventories, helped boost the economy, Commerce data shows.

Economists, meanwhile, said the soft fourth-quarter performance may be only temporary.

“GDP grew 1.1 percent annualized in the fourth quarter, but the economy was not nearly as weak as that number suggests,” said Mickey D. Levy, chief economist at Bank of America.

Auto sales, hurt by gasoline prices and an end to popular buyer incentives, started picking up again in December.

And a decline in government purchasing, which followed slower defense spending in the fourth quarter, is another of the “one-time anomalies” unlikely to be repeated this year, Mr. Levy said.

The Commerce Department yesterday also published figures showing a still-strong housing market. It estimated sales of new, single-family homes reaching 1.28 million in 2005, a 6.6 percent increase from 2004.

December sales increased 2.9 percent from November and 1.8 percent compared with December 2004. The average sale price was $272,900.

Bush administration officials said the GDP slowdown reflected the effects of Hurricane Katrina and other major storms that disrupted energy production and coastal economies, as well as the drop in auto sales.

“The preliminary estimate is lower than what was expected. But I think it’s important to look behind the numbers,” said White House spokesman Scott McClellan.

Economists said rebuilding along the Gulf Coast is likely to boost first-quarter GDP figures, though it appeared to drag on business investment last year.

“It is possible that the hurricanes that hit in August and September had a bigger impact on measured GDP growth in the fourth quarter than in the third. … The hurricanes probably dragged on investment, too,” said Nigel Gault, an economist at Global Insight, a private financial and economic consulting firm.

Imports of goods and services jumped more than 9 percent in the fourth quarter, also dragging down economic growth. That trend is unlikely to abate.

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